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CREDIT, PRODUCTION
AND INFLATION
The Thirty third Annual Report
of the
FEDERAL RESERVE BANK
OF PHILADELPHIA
19 47
CONTENTS
Page
Introduction
.............................
1
Lending trends and problems
................
4
The trend of business
......................
9
Monetary policy
..........................
15
The Federal ReserveBank
of Philadelphia.....
25
Directors
28
................................
Officers
.................................
Appendix
................................
29
31
FEDERAL RESERVE BANK
OF PHILADELPHIA
April 30,1948
To Member Banks in the
Third Federal ReserveDistrict:
The dominant economic problems of 1947
were those of credit, production, and inflation.
Recent developments,particularly in the international scene,suggest that they will continue
to be problems in 1948. The Thirty-third
Annual Report of the Federal Reserve Bank
of Philadelphia deals with those questions as
they were raised by banking and business
developments and by monetary policy during
1947.
ALFRED
H.
WILLIAMS,
President.
CREDIT, PRODUCTION, AND INFLATION
The key
economic problem in 1947 was an increasein spending
Powerin
relation to a flow of goods limited by shortagesof productive
resources.This
posed the problem of restricting credit expansion and
provoked
considerablediscussionas to the "productivity" of credit.
Many disagreements have
arisen because participants have not
been
aware that they were using the same term-"productive credit"
__to mean different
things. We have permitted ourslves to be confusedby
time to
defineit an appealing phrase becausewe have not taken the
or to seek out the major sourcesof disagreement.
Differences
in the meaning of the term "productive credit" arise
mainly from
fact that we view it from different positions within
the
the
economy.
lender or
If
borrower
visualized from the standpoint of the
in
largely
terms
of its
loan is measured
mPact productivity of a
in
upon the individual or businessfirm. If viewed terms of the
Eahorny
as a whole, it is the impact on total output that is important.
ch of
his own experienceand
theProblemssýi ý1 to
ich hehis directlyy concerned.
eto
rred
whrelate
To the
in his own
thMediate individual lender who is interested primarily
profit, credit is apt to be consideredproductive as long as
borrower
inte rower fulfills his contract-that is, so long as the loan and
are repaid when due. For example, the lending officer of a
co
kmmercial bank necessarilyfocuseshis attention on particular loans.
May be
extensive influenced in his decisionsby broad experienceincluding
knowledge
business
conditions
of the effects of general and specific
is backthis
the successof his customers. But all of
job is
His
qualifying
better.
him to do his immediate job
oound
loan
or renewal
shderide
ould bewhether a particular application for a new
granted and, if so, upon what terms and conditions.
The
ci if individual borrower is likely to consider a loan productive
been he is better
off than he would have been had the credit not
granted.Obviously,
certain loans that might qualify as productive
1
if visualized from the viewpoint of the lender would not necessarily
if
qualify from that of the borrower, and this would be true even
there is no disagreementat all as to the facts with respectto the loansA disagreement would arise exclusively from the different positions
from which the question is viewed.
Most bankers recognize the broader aspect of responsibility
involved in granting credit-that borrower and lender are not
the only parties affected by loans. A grant or denial of credit afieCts
the entire economy. And general economic conditions affect the
soundnessof particular loans. It is common to draw a sharp distinC'
tion between productive and unproductive or speculative loans.
Usually, this distinction is basedupon what the prospective borro"'er
intends to do with the funds. For example, if he uses the proceeds
'
to increase his output, the loan is usually considered "productive.
On the other hand, if he uses the funds to accumulate large invenf
tories in anticipation of price increases,and thus take goods out of
the productive process, the loan is usually considered "speculativeel
Bankers usually object to speculativeloans primarily becausethey
that too many loans of this type, especially if granted by banks, create
an unhealthy condition in the economy as a whole. As a consequence)
sooner or later the whole economy,including the banking system,Nil
suffer.
Thus, as attention is shifted from the individual transaction to that
by
of the economic system it becomes necessaryto adjust standards
n
which productivity is judged. The new standardsmust be related
to the effects of the loan transaction on the individual lender
borrower, but to its effects on the
Stem
operation of the economic Sy
loaIl
As previously indicated, if a borrower
uses the proceedsof a
ways to increasethe efficiencyof his businessand to increaseits outPby
the loan is usually regarded as "productive," when measured
or
individual standards. But what if the machinery, the materials,
?hl
the labor required are taken from some other businesses?
clearly, the borrower increaseshis output only at the expenseof soCes
ade
one else and each through his competitive bidding for scarcereso
nh
drives prices higher. This is necessarilythe chief result of loans
when the economy is fully employed. The output of one bustles5
bid ing
has been increased,but that
businesses
were
ut
which
of other
out
for scarce materials they did
decreased.
The
total
is
not get
2
of the economy has not changed. What has happened is that new
spending power has been created which enables the borrower to
increasehis
proportion of the total output without, however, increasing total production. Thus,
what started out as, and on the basis
of individual
standardswas, a productive loan turns out to be unproductive
and inflationary from the standpoint of the economy as a
whole. Under
conditions of full employment the new money created
by loan
expansion adds to the total demand for goods without a
correspondingincrease in the
supply. The result is higher prices.
Credit
has
financed
expansion
mainly higher prices instead of larger
output.
The
above analysis indicates the reasons for the difference of
"Pinion between
the commercial banker and the central banker as
t° the
"productive credit." The difference in the two
meaning
"lee's is likely of
become
to
pronounced during a period of inflation
Whenthe
Even under those circumeconomyis
stances,the individualoperating at capacity.
banker commonly thinks of his loans as being
productive.
They are mainly to business firms and for purposes of
pr°duction.
It is to his interest for them to be so, for such loans are
motelikely
to be repaid. To the central banker, however, who has a
re$Ponsibility
to contribute to economic stability, credit expansionmay
or may
not be productive, depending upon general economic
C"nditions.
What
are the implications of this analysis for credit policy? For
dui
Commercialbanker it
means he should be particularly cautious
times such these to
the
as
grant only sound, productive loans from
Individual
because
point of view. But this alone will not suffice, both
the banker can
not measure the effect of his loan on total
°nal output
because
than individual and
the concerted action of all lenders, rather
goes
action, is necessary. Restricting credit expansion which
Prilnaril
the
y to finance higher prices can best be accomplished by
Central
"hich
through his control over the availability of reserves
serve as the basis for
credit expansion. The promotion of
"nomic
stability and the general welfare impose upon the central
the responsibility
wen
of checking increasesin the volume of credit
When
therefore
rvie
eat expansion
is unproductive from thelsocial point
v.
3
Lending Trends and Problems
"Productive credit" may mean different things to different people,
but there is no doubt that the overwhelming majority of the loans
to the banker's conception
which banks have been extending conform
is. More and more, banks are returning to
"productive
credit"
of what
demand
one of their traditional functions of meeting the community's
banks
in
Third
Federal
the
for credit. In providing this credit, member
loans
largest
to
the
have
their
Reserve District
volume
expanded
since 1931. Their loans at the end of 1947 comprised 29 per cent of
their earning assets, a ratio which may seem small when compared
but which is considerably
with the 69 per cent prevailing in 1929,
As shown in
above the 16 per cent existing at the end of the war.
increasing
banks
last
amounts of credit available
the chart,
year made
to all the important types of borrowers-businessmen, home owners,
consumers, and farmers.
The greatest expansion was in business loans. The number of
concerns in operation was increasing, and business activity was at a
higher level than in any previous peacetime year. Businesses needed
more fixed and working capital to meet the huge demands for their
products. A large part of their capital expansion was financed out of
their own depreciation reserves and liquidation of Government security
holdings. Money was raised also by floating new security issues; but
although the volume of new issues was the largest in many years,
market conditions made such financing increasingly difficult and some
businessesturned to banks for long-term funds. As prices and
costs
rose, business also needed larger working capital. Receivables were
expanding, and inventories, although still low in relation to sales,
were growing.
A survey made by this Bank toward the end of 1946 revealed
many important facts as to how banks were meeting these demands
for business loans. Perhaps the most significant finding was that
bank lending is predominantly small scale. Nine out of ten business
loans were to small concerns-the local grocer, dry cleaning
establishments, or restaurant-and most loans were of small amounts.
The
interest rate was typically 5 per cent or more and the term was usually
short.
4
LOAN TRENDS: WAR AND POST WAR
MEMBER
BAN
IRD
FEDERAL
RESERVE
DISTRICT
Y ILL ONS
I
1600
1500
1400
130C
120(
TOTAL
110f
100)
90 0
so 0
7 0
6 0
5 )0
L INDUSTRIAL
, -COMMERCIAL
4 )0
3
00
REAL ESTATE
(N0; {'ARM)
SECURITY-
1945
5
Real-estate loans rose rapidly during 1947 despite the fact that
for a time during the early part of the year, activity in building and
be falling short of expectations. A growing
construction seemed to
for new homes rather
proportion of mortgages, nevertheless, was
in
And
contrast to the war
than purchase of existing properties.
to
home
pay
off their mortgages
were
able
owners
period, when
larger than repayments
mortgages
was
the
of
new
rapidly,
creation
debt. Liberal terms
of old ones, thus expanding the total mortgage
heavily
to
the
expansion of realon G. I. mortgages also contributed
estate loans.
The growth of business and real-estate loans, although large,
Consumer loans rose
was somewhat less in 1947 than in 1946.
Production
in
1947.
of consumers' durable goods was
more rapidly
catching up; consumption reached an all-time peak. Many individuals
in the lower income groups had used their accumulated liquid assets,
were saving less out of current income, and were using credit to buy
long-awaited automobiles, washing machines, and the like. Regulation W was terminated in November, eliminating control over down
payments and maturities-a factor which had helped to hold down
the volume of consumer credit.
The total volume of farm loans in this district is small compared
with other types of loans, but farm credit constitutes an important
part of the business of many rural banks. Farmers needed credit to
expand and improve physical facilities, for during the war they were
unable to carry out many normal improvements and replacements. A
survey made by this Bank in mid-1947 indicated that a large proportion of farm credit was for capital purposes-for buying land and
High-level
machinery and for constructing or improving buildings.
farm production and higher prices also required substantial current
outlays for feed, fertilizer, and the like. Farm loans, like business
loans, were typically small scale.
Security loans were the only type which did not share in the
general upward trend. These were reduced during 1946 as bank
customers repaid loans which they had obtained to buy Government
securities. The absence of new Treasury financing, the slow activity
in the private security markets, and high margin requirements have
kept these loans at comparatively low levels.
Lending
In the process of expanding their loans by 75 per cent
problems
since the war, member banks in this district have experienced a certain amount of growing pains. Banks always have three
basic problems, and these often may not be consistent with each other:
how to supply credit to the community, how to protect depositors, and
how to make a profit. They have been solving the first by making
more loans, but in doing so they have been complicating the other two.
Expansion of loans means assumption of additional risks. The
ratio of capital accounts to "risk" assets (total assets less cash and
Governments) at the
end of 1947 was 27 per cent as compared with
39 per cent in 1944, when Governments were a much larger proportion of bank assets. The ratio has returned to the level prevailing in
the 1930's.
Each type of loan
increase
reflects evidences of factors tending to
There
risks.
is constant danger, for example, of over-expansion of
fixed capital in business
concerns. The ratio of debt to net worth
does not yet
larger
be
appear to
excessive, but it would be better if a
proportion of business financing were done with internal funds and
equity financing rather than fixed debt. Inventories are still low compared with sales but could always become top-heavy if sales fell off.
Collection
of receivables in some lines seems to be slowing down.
In real-estate lending,
inflated
risks arise in making loans against
property values. For some time, banks have been taking steps to
avoid undue risks in G. I. loans by exercising greater caution in
appraisals and by requiring down payments of 10 per cent or more.
Government
guarantees cannot eliminate risks in mortgage lending,
but merely
shift them to the taxpayer. Undue reliance on guarantees
and unsound lending
reflect on the lenders
would ultimately
themselves.
In consumer
credit, there are growing evidences that the financial
position of consumers in the low income groups is weakening and
that collections
are slowing down, even though such credit is still low
compared with
consumers' incomes. With the elimination of Regulation W, there is danger
of excessive liberalization of loan terms in
an effort to compete for
new business.
7
Farmers are still much better off than before the war, yet excessive
through borrowing,
capital investment at inflated prices, particularly
future.
in
the
can weaken their position
Bankers are constantly on the lookout for such risks which are
inherent in bank lending. But the problem is particularly difficult
becauserisks usually show up only long after the loan is made. Losses
lending peak has passed and
and charge-offs always rise after the
business activity turns down. During 1945 and 1946, member banks
in this district recovered more on their old loans than they lost and
charged off. In 1947, however, recoveries balanced losses and chargeoffs, and we may expect losses and charge-offs in 1948 to exceed
recoveries. Risks will become an increasingly difficult problem.
Expansion of loans in some ways appears to solve the third basic
the gross return on
problem of banks-how to make a profit-for
loans is 3.8 per cent as compared with 1.8 per cent on investments.
But from the gross return must be subtracted net losses and chargeoffs, which in a bad year such as 1934 amounted to as much as 3 per
cent of total loans. And the costs of making and servicing loans are
considerably more than the costs of buying Government securities.
The greater the problems of lending become, the more essential it
is to have well-trained and experienced credit men. Since good credit
men command and deserve high pay, increasing loan volume is apt
to mean rising expenses for wages and salaries. Payment of high
salaries can contribute toward the maintenance of a competent staff
and result in net gain through higher net returns per unit in lending
activity.
Bank lending Like the rest of us, the individual banker is caught in
and inflation the inflationary spiral. Inflation is a fundamental factor
expanding his loan volume. Higher costs and prices increase the
amount of bank credit which business, home owners, consumers, and
farmers need. Higher prices boost bank earnings but they increase
risks and expenses.
Yet, paradoxical as it may seem, rising bank loans are a
cause
as well as a result of higher prices. As loans expand, bank deposits
also rise and bank deposits constitute the bulk of our money supply.
More money means more spending power. To the individual banker
8
the key to the problem lies in more production, and when he makes a
loan it is usually to enable a producer to increase his output. Actually,
since our resources are being practically fully utilized, this producer
can expand his output only by bidding goods away from some other
producer. Production cannot be the immediate solution to inflation.
This fact became clearly
during 1947.
apparent in the business world
The Trend of Business
Business developments in 1947 may be reviewed either as a
chronology of events or in terms of basic factors which provide a
key to the
in the
nature of events. Chronologically, a marked change
general business outlook and in the buying attitude of the public
occurred about mid-year. Of greater fundamental significance, however, was a continuing discrepancy between spending power and the
supply of goods at stable prices, resulting in a substantial rise in the
price level during the year.
Intense
business
The record of business and industry in the Third District
during the year as a whole matches that of banking. It
activity
is a record of intense business activity and high employment. For example, during much of 1947, although a few localities
experienced exceptional difficulties, the Pennsylvania State Employment Service reported labor shortages throughout the state, especially
during the
second half of the year. The number of persons claiming
unemployment compensation and veterans' allowances at the end of
the year was less than half
the already small total at the beginning.
Employment in
construction and trade and services expanded substantially. Factory
employment in December was slightly above the high
level of the
previous year. People in Pennsylvania factories during
1947 averaged
over 39 hours of work a week, slightly more than in
1946, and
exceeded 40 hours during the last quarter.
Advances in hourly
earnings were general
throughout industry in rates of pay and weekly
the Third District as in the nation. Unlike the
1946 series, the "second
round" of wage increases was accomplished
without wide-spread
work stoppages. Workers in Pennsylvania
factories
averaged nearly $50 a week at the end of the year-a 15 per
1946 compared with a nation-wide gain
cent increase over December
Weekly
wages ranged from about $35 to $40
of about 11 per cent.
lines
to
in some soft goods
nearly $60 in some durable and producers'
factories.
goods
Agricultural incomes in Pennsylvania, New Jersey, and Delaware
levels. Delaware showed a slight drop in
were also at very high
from
farm
marketings in comparison with the previous
cash receipts
Third District states were in the neighborbut
in
the
other
gains
year,
hood of 15 per cent. The increase in net farm income was probably
because of the pinch of high
somewhat smaller than this percentage
feed-deficit
grain prices which were generally unfavorable to eastern
areas.
Big pay
High incomes on the part of virtually every group
The
rolls made for active trade throughout the district.
booming trade dollar value of department store sales was about ii
per cent above that for 1946. The last two months of the year
established new monthly records. Philadelphia appears to have made
a slightly greater gain for the year than other Third District trading
centers, but in general, the increase in sales was fairly evenly
distributed.
The experience of the department stores illustrates one of the
year's outstanding characteristics-a marked shift in business and
consumer attitudes, from cautious pessimism to buoyant optimism.
During the first quarter of the year, especially during the pre-Easter
season, department store sales were disappointing. Customers were
spending at a faster rate than early in 1946, but viewed in contrast
with a record Christmas season and considering the high level of
inventories which the stores were holding, the spring slow-down
was
a matter of some concern. It seemed to be a confirmation of the widespread belief that the end of inventory accumulation during 1947
would signal a recession of significant proportions. Scattered lay-offs
in the textile and apparel industries reinforced this view.
Steps were taken immediately, therefore, to reduce inventories
and
to shorten commitments. Clearance sales, especially in women's
apparel lines, were publicly advertised for the first time in years. The
result of a spring survey of Philadelphia department stores, conducted
by this Bank, revealed that prices in many lines were lower.
It was
10
clear that department store buyers had stopped placing orders indiscriminately and that overdue orders were being cancelled whenever
possible. New orders were held to a minimum, substantially below
the level of the previous year.
Abrupt
With rising sales in April and May, however, the
in
change
situation changed abruptly. Inventories had declined and
outlook
the stores were running out of merchandise in many
instances. By the middle
Plan for a 10
of the year, the Newburyport
per cent across-the-board price slash and the fanfare of publicity which
Department store buyers
accompanied it were all but forgotten.
reentered the wholesale markets with heavy orders. In July, among
the larger department stores in the district, new orders began to
exceed those of the previous year. In the last quarter, net new orders
were 60 per cent greater than in 1946.
A parallel development occurred in construction. Early news on
building was
unfavorable in that it failed to show a substantial
recovery from the precipitous decline in construction activity late in
had
1946. But by July it became
apparent that home buyers either
been reconciled
later
to high prices or expected even higher prices
on, and that businessmen had decided increased capacity would pay
for itself despite high building
costs. Residential construction rose
in the
to near-record levels
and a survey of manufacturing concerns
Philadelphia
and
equipplant
area showed that expenditures on new
ment in this area, as in the nation, were at a very high rate.
The recession that
was so generally expected, and which many
considered to be upon us in the spring of 1947, did not materialize;
nor was it clearly in sight at the turn of the year. The consensus of
"expert" predictions
and business polls at the beginning of 1948 was
definitely
optimistic.
1947 was described in our January Business
Review
as the "year of the slump that never came." Renewed optimism
and the expectation of higher prices, moreover, helped strengthen
those factors
which act to continue the inflationary spiral.
Price
inflation
While the records of department store activity and construction in the district illustrate one outstanding
overstated
characteristic of the year, the record of production points
real gains
to another.
Construction increased significantly over
1946 here
as elsewhere, but agricultural output probably did not gain
11
(for the nation as a whole there was a slight decline ; and industrial
the entire district inched
and manufacturing-for
production-mining
This
that
gains in income and
suggests
upward a mere 1 per cent.
in
dollar
terms. The really
in
than
physical
trade were more
been
have not
in goods made available for
spectacular advances
but
in
the prices of goods and labor. We
purchase or labor performed
inflation
have witnessed an
of serious proportions.
Although its manifestations are apparent in individual households,
the problem of inflation is basically a matter of the total supply of
goods and services available and total spending power in the entire
value of all goods
national economy. Gross national product-the
$230 billion for 1947 as
and services produced in the nation-was
compared with $204 billion for 1946, a 13 per cent rise. During the
fourth quarter of 1947 we attained a rate of $241 billion a year. The
term "gross national product, " of course, is a value or dollar magnitude. It could just as well be called "gross national expenditure, "
which in this case would seem to have a more appropriate connotation.
The rate of gain in physical output was only about half that which
took place in gross national product or expenditure. Moreover, much
of this gain over the previous year appeared merely because widespread
strikes of 1946 were not repeated. The monthly rate of output did
not increase greatly during 1947.
Peak proOur economy operated close to maximum capacity during
duction
the entire year. Employment reached peacetime records
reached
and unemployment, at about 2 million, was at the
minimum allowed by seasonal changes and job turnover. The appearance of labor shortages made it clear that unless some services were
drastically curtailed or hours of work increased, a bigger rise in
output
was not possible. And even if it were agreed that working hours
should be increased, bottlenecks in those industries which were already
producing around the clock would not have allowed great over-all
expansion. Under prevailing conditions, a sudden increase in the
flow of goods and services can not be expected. Expansion
of our
physical output at a rate greater than, say, 5 per cent a year would
seem extremely unlikely.
In the process of increasing physical production by 7 per
cent,
personal incomes after taxes-wages, dividends, farm earnings, and
12
other categories-were increased more than 10 per cent over 1946 to
$175 billion.
Undistributed profits of corporations rose more than
50 per cent, though over half was "paper profits" arising out of
inventory appreciation. The increase in personal incomes does not
reveal the full impact of consumer spending. Consumers saved 9
per cent of disposable incomes in 1946; they saved only 6 per cent in
1947. Consumption expenditures by individuals, therefore, rose nearly
15 per cent and personal savings dropped from $15 billion to $11
billion.
To some extent, increased outpourings of consumer dollars looking for goods
and services were offset by a slight decline in Government purchases; but an increase in net exports and larger investment
outlays by business tipped the scales further in the direction of a
greater increase in spending than output.
The record of business
expenditures for new plant and equipment compiled by the Department of Commerce and the Securities and Exchange Commission seems
in
to confirm the
results of the survey of manufacturing plants
Philadelphia
Exclusive
of agriculture,
conducted by this Bank.
American business is
billion for
estimated to have spent nearly $16
new factories and machinery during 1947. It is expected that this
rate will be maintained at least through the first half of 1948. The
outlay for producers' durable equipment by all users in the second
half of 1947
was at a rate of $18 billion a year. Even taking price
changes into account, this is a volume of investment in producers'
goods which exceeds that of 1929. There is little doubt that 1947
witnessed a capital boom of large proportions.
Money,
The extra money for higher wages, bigger dividends,
goods,
and record spending during 1947 came from several
Prices
sources, which are set forth in detail in other sections of
this report. Obviously,
the decline in the rate of personal savings was
one source. Past savings
was another. Bank credit was still another.
But however it
came into being, the increase of effective money supply
in markets for
relatively scarce goods and services made increased
prices and wages
possible. Indeed, in an atmosphere of business
optimism, with inflation
no longer suppressed by price control, greater
money supply and faster
money turnover made higher prices virtually
inevitable.
13
The average of wholesale prices in 1947 was 25 per cent above
1946 with
1946. A rapid increase, of course, came toward the end of
during
1947
alone. This
decontrol. Prices rose about 15 per cent
rise.
figure, in historical perspective, represents a sharp
Contrary to the pattern of price movements in 1946, when farm
led all others, prices of industrial commodities
and food commodities
increased somewhat faster than the
and durable consumers' goods
Fuel and lighting
lagged.
average during 1947. Food prices
led
all other price groups with gains
materials and building materials
Prices of goods purchased by
of 29 and 21 per cent, respectively.
index, rose 9 per cent
"cost-of-living"
formerly
the
called
consumers,
during the year. Modification of rent controls allowed that item
to rise by about 6 per cent on the average, the first appreciable increase
since 1941.
I
One of the most significant price developments was the persistence
high
of
prices for many goods whose supply, it had been presumed,
had "caught up" with demand. This was true of women's apparel
and of shoes, a line in which substantial production cut-backs actually
occurred. A price cut for tires in the spring was erased not many
months after it was made. For those who believed that "supply and
demand" would stabilize prizes during the year, this development
was
the most disturbing of all. It soon became evident that demand did
not stand still while supply tried to catch up, and that if increased
output was accompanied by increased spending power, demand in
terms of dollars might move even further ahead.
The individual From the analysis of the year's events which has been
firm in the
made here, beginning with the fact that our productive
economy
resources are fully utilized, it is obvious that successively higher price levels do not necessarily bring forth greater
output. Those who expected that higher prices would "take care of
themselves" by bringing a flood of goods were forced to re-examine
their assumptions. Either they had been thinking in terms
of out
pre-war economy, in which excess capacity was usual, or they were
thinking of the industrial system as an individual firm.
A year of
more ago, if one were to ask a manufacturer whether he could
duce more goods, provided the price of his product were higher, pro
th,
14
He could
answer would most likely have been in the affirmative.
his
higher
envision
ability to pay
wages and raw material costs and
so acquire additional labor and supplies. He could foresee greater
profits which would enable him to buy more machinery and extend his
plant. The same answer would have come from a second manufacturer and a third, and, in fact, did come from scores of other industrialists who had the same visions. It might have come, too, from
some labor groups.
When the opinions of individual producers as to their own abilities
were added up, the consensus so obtained seemed to imply that higher
prices for everybody would mean proportionately more output from
everybody. On this basis it is understandable that all the credit put
first
into producers' hands to
meet higher prices and wages was at
thought to be truly productive. But the consensus was misleading.
In this case the
its parts.
whole was something other than the sum of
Higher prices for
him
to take workers
one manufacturer enabled
from a second;
bid away
more profit for the second allowed him to
construction materials from a third producer; more money for the
third man gave him the wherewithal to buy some of the steel which
the first might have used. Increased wages for workers vanished in
higher living
for indicosts. The factors involved in policy decisions
vidual firms are different from those concerning the industrial system.
Monetary Policy
The very
existence of the Federal Reserve System is an illustration
of a basic fact learned from our economic experience: that the sum of
unrestricted individual
actions often falls short of the maximum overall welfare.
Indeed, it is
For money plays a
a particularly apt illustration.
strategic role in our
economy, performing the indispensable function
of facilitating the
exchange of goods between buyers and sellers-of
greasing the wheels" of commerce.
Even more important,
we have
built
up a system in which changes in the quantity and use of money
exert a tremendous influence
on the level and nature of our economic
activity.
15
Commercial banks occupy a key position in this system. For it is
due
With
through the banks that money is created and retired.
depositors,
regard to their responsibilities toward their stockholders,
to expand their earning
and communities, banks generally endeavor
deposits;
their
and bank deposits
assets. In doing so they expand
We
have long since
bulk
of our money supply.
constitute the great
found that this system, if allowed to operate without some sort of
fluctuations in spending power,
restraint, can produce undesirable
Congress has
inducing disastrous fluctuations in economic activity.
determinant
of
partly circumscribed the profit motive as the ultimate
the money supply by eliminating the profit motive for Federal Reserve
Banks and by giving the Federal Reserve System the responsibility for
banks to
exerting an over-all influence on the ability of commercial
their
contract
earning
assets
expand or-under other circumstances-to
and simultaneously deposit money.
All this is not just theory. In 1947, more than at any time in
recent years, it had a direct application to pressing business and
financial problems. The economy was plagued by a persistent tendency for demand to outrun supply at stable prices. And, as we have
seen, the actions of individual groups did little to solve the problem
-indeed, in most cases aggravated it. The individual producer could
increase output only by bidding scarce resources away from another
producer; then he offset his higher costs by charging a higher price
for his product. The worker, in turn, sought to make up for higher
living costs by demanding more wages; and as costs and prices
rose,
the individual banker did his utmost to perform his traditional function
of supplying "sound productive credit" to the community. The combined effect of all these individual actions was to give us
more
inflation.
The problem did not arise over-night. Throughout 1946 the
Federal Reserve System had been concerned with the monetary
aspects
of it, particularly the so-called "monetization of the public debt. "
This was a practice which had been going on for some time, and
was
directly traceable to the "pattern of rates" on Government securities
maintained by the monetary authorities to help assure the success of
war financing. Inasmuch as the liquidity of all Government securities,
regardless of maturity, was virtually assured by maintenance of a fixed
16
pattern of rates, banks naturally tended to sell short-term issues yield3/8 or 3/8 per
cent in order to buy longer-term securities yielding 2 or
21/2 per cent. Sales of short-terms, however, tended to push up their
yields, forcing the Federal Reserve to buy in order to maintain the
pattern. But Federal Reserve purchases supplied reserves which the
banking system
could use to expand earning assets and deposits to
several times the original amount. This was monetization of the public
debt. It was
reflected in rising deposits, a heavy concentration of
short-term Governments in Federal Reserve portfolios, the lengthening of commercial bank Government
declining
security portfolios, and
yields on long-term bonds.
A number
of steps had been taken in 1946 to discourage the
practice. In the spring of the
had eliminated
year, the Reserve Banks
their preferential
for
loans
on short-term Governrate of 1/2 per cent
ment securities-a rate
had
prevailed throughout the war.
which
Shortly thereafter
large
some
commercial banks had raised their
charges on certain types
loans
of
secured by Government securities and
on brokers' borrowings. Rates
on acceptances were increased slightly
at various times around the
the
middle of the year. In the meantime,
monetary authorities pursued
"opendescribed
as an
what the market
mouth policy" in an
to stem monetization of the public debt
effort
by injecting
some uncertainty into the securities market.
These steps, taken in
1946, met with some success,as is indicated
by the fact
that the downward trend of yields on long-term Governdebt
ments was halted in the
spring of the year. The Treasury's
retirement program, inaugurated in March,
bank
reduced commercial
holdings
Such retirement,
of Government securities by $13 billion.
however, did
not greatly reduce the amount of privately held money
since the reduction
War
was accomplished largely by use of existing
Loan deposits.
To the
of
monetary authorities another problem-monetization
private debt-was becoming
By
the
end
of
increasingly troublesome.
1946 the
post-war expansion in commercial bank loans had already
amounted to $71/2 billion
and would have been considerably more
had loans
to finance Government security purchases not been paid off
in substantial
amounts during the period.
17
BUSINESS DEVELOPMENTSIN 1947
THIRD
FEDERAL
DISTRICT
RESERVE
6
1946100
INDEX
110ý
WITH
BIGGER
INCOMES...
INDUSTRY
PRODUCING
ABOVE LAST YEAR'S
LEVEL...
`
CONSUMERS
MORE...
i I
SPENT
I
ioo
110
110
kERT
_ýI
__.
H1 GH
_
FACTORY
.MLNI . _
130
...
BUSINESS
REBUILT
INVENTO{iIES...
10o
120
140
110
AND PAYROLLS
RISING,
130
100
120
CAPITAL
EXPENDITURES
PHILADELPHIA
MANUPAGTURER5
110
ss loon
o
wýR
TO SEPT. ý4
) )OlOOOi000
100
AND SPENT
FOR CAPITAL
EQUIPMENT.
m
MORE
m
130
WHILE (ARM
HIT RECORD
120
110
INCOME
LEVELS.
ALL
THESE
DEMAN '
COMBINED
TO FORII
PRICES
STILL
HIGH'
130
120
.0
too
90
d
ýý
Imo/
110
1947
100
A-oCONSUMER
.. I
1947
PRICES
III
/
18
FINANCIAL DEVELOPMENTS IN 1947
UNITED
STATES
BILLIONS
BILLIONS
lr
170
ý--A
168
10N4[
;ýD
THE MONEY
R05E.,.
SUPPLY
Curer
FORCES
OFFSET
+Z
ATIflahv
WERE
AS...
PARTLY
THE TREASURY
IN MORE CASH
IT
PAID OUT...
n
D[oos
T5
CUFPCNC
MCI
TOOK
THAN
ýý
146
i/
164
P1117111-1-1110z,
1
ýýý;
ýC/
ý-NA
V
42
TC DEVOSITS
N D CURgENCT
(ncronnec enunrus.
)
ý%/
iaz
U1
4DYT
4
DEPOSITS
GOVT
SECURITIES
RETIREMENT
AS DEBT
PUBLIC
REDUCED
CREDIT
OF BANKS...
l
38
29
26
AS BANKS EXPANDED
PRIVATE
CREDIT...
24
24
AND FEDERAL
CREDIT...
RC.ULRV[
22
22
20
All
17
CoAPORATLS, ý
ý
ON THE
GROWING
BASIS
OF
RESERVES..
7-:ý
AN(7 AS INTEREST
RAfrS
ROSE.
is
MEOiuM-TERM
GOV"S
2
FED LARGELY BY AN
INFLOW
OF GOLD.
ýoM-ý--ý
ýýPýA
2
0
19 47
ý_I
11111II11
1947
19
, ýýýý,
facing the
Objectives As we entered 1947 the basic problem still
Reserve
excessive
supply of
Federal
authorities was an
of policy
$143
billion
held
business
of
money
either
money. Individuals and
billion
in cash or in their bank accounts. They owned, moreover, $80
be regarded as "near
worth of Government securities which could
heritage
of war financing, was
money. " This money supply alone, a
less
for
people were still using their money
an inflationary threat,
intensively than before the war. In other words, the existing money
drive up prices solely by being turned over
supply could be used to
more rapidly.
One objective of Federal Reserve policy in 1947 was to restrain
debt and the further growth of
monetization of public and private
the money supply. Another was to discharge the System's responsibilities for maintaining orderly conditions in the Government security
markets. Policy decisions in 1947 reflected attempts to reconcile these
conflicting objectives.
Policy
Action taken by the monetary authorities during a conaction
siderable part of 1947 was directed primarily toward
combating monetization of the public debt. In the first half of the
year the Treasury paid off $2.9 billion of maturing issues of Government securities held by commercial banks. Yet, in retrospect, it seems
that many people were confused as to the deflationary effects of this
debt retirement. They could see that our money supply grew during
the war because banks bought Government securities, and believed
that the money supply could be reduced merely by reversing the
process-by paying off Governments held by commercial banks. But
even though the Treasury withdrew funds from the spending stream
and reduced bank reserves when it collected taxes and sold savings
bonds-as soon as it retired securities held by banks it returned to
them reserves which could be used again to expand deposits. It was
not enough to retire Government debt held by the commercial banks;
other measures were needed.
In July, therefore, the monetary authorities began their efforts to
break out of the "strait jacket of the pattern of rates" which they had
established as a measure of wartime financing. To remove the incentive for monetization of public debt through switching from short- to
long-term issues, the Treasury and the Federal Reserve System
20
undertook a series of steps to raise short-term rates and to diminish
the spread between short- and long-term rates. During the second
half of the year,
rates on 90-day Treasury bills were permitted to rise
from 3/8 per
cent to nearly 1 per cent and rates on one-year certificates
were increased from 3/8 per cent to 11/8 per cent.
On July 2 the Federal Reserve Banks announced that beginning
with the July 10 issue, they would no longer offer banks the privilege
of selling Treasury bills to the System with option to repurchase at a
fixed rate of 3/8
per cent. The purpose of this action was to restore
"the bill
as a market instrument and [give] added flexibility to the
Treasury's debt
management program. " To prevent any rise in shortterm rates from increasing the Treasury's debt servicing costs unduly,
provision had already been
made to transfer 90 per cent of the net
earnings of the Federal Reserve Banks, which held most of the bills,
to the Treasury. The Treasury then
offered, between August and the
end of the year, a number of short-term issues for maturing securities,
and by increasing the rate or by reducing the maturity, raised the
"short end
of the pattern, " as shown in the chart.
THE PATTERNOF RATES
YIELDS OF TAXABLE TREASURY SECURITIES DEC.31,1946-47
BASED
PLRCENT
ON
MEAN
OF
CLOSING
BID
AND
ASKED
QUOTATIONS
F R CENT
--
250
.50
1947
200
00
1.50
50
1946
1
i.oo
"%
LýJ`
--
f
.I
i.oo
BANK
ELIGIBLE
FIXED MATURITY ISSUES
BONDS
" CALLABLE
BANK RESTRICTED
" CALLABLE
BONDS
5
50
5
YEARS TO
10
15
CALL DATE OR MATURITY
21
20
But the longer end of the interest rate curve moved upward as
both supply and demand factors.
well. This occurred as a result of
by
Treasury
trust funds and the issuOn the supply side, heavy sales
bonds
ance of $970 million of special non-marketable 21/2 per cent
in October were designed to meet the needs of those institutional
investors who had previously been depressing the yields of marketable
long-term Governments as they sought for investment outlets.
On the demand side, the rise in longer-term rates reflected both
uncertainties created by rising short-term rates and rapidly expanding
opportunities for extending private credit. In the second half of
1947, commercial banks increased their loans and their investments
again as
other than Government securities by $5 billion-two-thirds
much as in the first half of the year. Other lenders, such as insurance
companies, were taking advantage of a growing supply of corporate
and municipal issues and were lending to private industry and individuals on a large scale. These opportunities for private credit
expansion took away the appetite of banks and other large investors
for longer-term Government securities.
But while these developments went far toward solving one
problem - monetization of public debt - they greatly intensified
another; monetization of private debt. For banks and other lenders
met a large part of the demand for private credit by selling their
Government securities. In supporting the Government securities
market, the Federal Reserve was forced to buy increasingly large
amounts of longer-term issues toward the end of the year, thus, in
effect, supplying the funds for private credit expansion.
As this new problem grew increasingly serious, action on
a
broader front became necessary. The measures taken primarily
to
combat monetization of public debt, it is true, also had some effect
on private credit. As interest rates on short-term Governments were
raised, rates on commercial paper, acceptances, and some business
loans increased. Yields on corporate bonds and on municipals
rose
substantially in the fall. In November, national and state supervisory
authorities issued a joint statement urging bankers to exercise extreme
caution in their lending policies. Nevertheless, policy became focused
more and more on over-all measures for combating monetization of
private debt-measures designed to put continuing pressure on the
reserve position of banks.
22
Fiscal policy was the most potent weapon. By taking in more
through taxation than it spent and by selling securities to non-bank
investors, the Treasury drew down private deposits and bank reserves.
During 1947 the Treasury
enjoyed a net budget surplus, sold more
savings bonds and other public issues than it redeemed, and obtained
funds from special issues to Government trust funds and agencies.
It was primarily
with these funds that the Treasury retired $10.9
billion of its
maturing marketable issues.
Increasing emphasis, however, was placed on retiring Federal
Reserve holdings
By taking
rather than commercial bank holdings.
this action the authorities could prevent the reserves from returning
to the banks and forming the basis for a further expansion of deposits.
Whereas in the first half
of 1947 one-fourth of the retirements were
of Federal Reserve holdings, in the second half one-third were of this
nature. The net effect of these operations would have been, "other
things being
equal, " to reduce bank reserves and bank lending power.
But "other things"
were not equal. In the first place, a substantial
volume of gold flowing into the country added to bank reserves and
bank deposits. In
the first half of the year the gold stock rose $700
million and would have increased more had the United States not
Fund;
turned over $688
million of gold to the International Monetary
and in the second half it rose $1.5 billion.
In the second
in
place, the System bought Government securities
order to maintain their prices and yields at the desired levels. These
purchases changed in character
the
as the year progressed, reflecting
shift from monetization
debt
to
monetization of
primarily of public
System
private debt. As long
former
the
problem,
main
as the
was
purchases consisted
in
order
of short-term issues: bills and certificates,
to support their
Governprices. Concurrently, the Federal Reserve and
ment agencies and trust
the
accounts sold bonds in order to relieve
however,
upward pressure on bond
the
year,
prices. Toward the end of
as bond prices declined, the System became a reluctant buyer of bonds,
both for its
for Treasury investment accounts. Finally, on
December own and
24, the Reserve authorities lowered the support prices of
fully taxable
issues. This action was taken in anticipation of the need
for
continued bond purchases in substantial quantities in the future,
an unwillingness to
pay the premiums established when public debt
was being monetized
and a desire to reduce the volume of purchases.
23
The System became an aggressive buyer-over $1 billion of bonds
were acquired in the last week of the year-in order to maintain the
for the year 1947 was that, despite
new pattern. The net result
billion
issues held by the System, the
$3
of
maturing
retirement of
total portfolio declined only $800 million, indicating net purchases
of $2.2 billion in the market.
Results
it is always difficult to evaluate the results of policy
of policy
action, for we live in a real world and seldom can know
with certainty what might have happened had different action been
taken or had no action been taken at all. But it is possible to draw
some conclusions by looking at events of 1947 in the light of the two
basic objectives of monetary policy: maintenance of orderly conditions
in the Government securities market, and restraint over the expansion
of credit and the money supply.
The first objective was successfully achieved. At no time were
Treasury debt management operations disrupted by disorderly market
conditions. The transition to a higher level of interest rates was
accomplished smoothly and on the few occasions when the market
might have been upset, as after December 24, the System stepped in
aggressively to maintain orderly conditions.
Changes in the Money Supply and What
(Billions of dollars)
Private money supply
U. S. Gov't deposits ...............
................
Total money supply
..............
Bank-held public debt:
Federal Reserve-
March 1Dcc. 31,1946
Caused Them
Ist half
1947
+
-
11.7
21.9
1.7
-
10.2
1.7
2nd Half
1947
+ 6.0
Year
1947
1+6.0
+ 6.0
+
1.7
4.3
- 1.0
+ 1.7
+
3.0
2.2
Retirements
Net purchases....................
banks-..................
Commercial
+
4.6
5.1
- 2.0
+ 0.5
Retirements
....................
Net sales
......................
Total bank-held public debt
-
12.8
5.8
2.9
1.4
-
1.2
0.1
-
4.1
1.5
+
+
+
18.1
5.8
+ 3.0
+ 0.7
+ 0.4
+
+
+
0.6
T
6.4
5.4
0.3
2.2
-
10.2
1.7
........
Bank loans and other investments
.....
Gold stock
........................
Other factors
.......................
Total money supply ...............
24
5.0
1.5
0.1
+ 6.0
+
+
8.0
2.2
0.5
+
4.3
In achieving the first objective, unfortunately, it was necessary to
compromise the second. But it would not be accurate to conclude
that actions to curb increases in the supply of money were without
result. Large-scale monetization of the public debt was halted. In
the first half of the year, banks had been selling their short-term
securities in order to buy longer-term bonds while, on the other hand,
the System was buying short-terms and selling bonds. In the second
half of the year this
situation was reversed. Part of the reversal can
be attributed directly to the
interest rates
policy by which short-term
were raised, and is reflected by the fact that commercial banks held
an increasingly large share of outstanding Treasury bills.
degree
A less tangible result
of policy was the injection of a greater
of caution into the market for private credit. Rising interest rates and
growing uncertainty made it more difficult for some borrowers to
obtain funds in the open capital markets. On the other hand, some
of theseborrowers then turned to banks for their funds, thus nullifying
the anti-inflationary
effects of uncertainty. Banks themselves were
screening their loans more
both in an effort to
carefully, however,
combat inflation and in growing recognition of increasing risks.
Yet the plain facts
are that, despite efforts to maintain pressure,
bank
On the basis of larger
reserves actually rose by $1.8 billion.
At
reserves the money supply
continued to grow during the year.
the end of 1947, individuals
in
billion
their
had
$6
more
and business
bank
Monetization of
accounts than they had at the beginning.
private debt, together
with the inflow of gold, had more than offset
the decline in bank-held
public debt.
The Federal Reserve Bank of Philadelphia
General
Operations of the Bank as a whole continued at high
operations levels during
1947, although volume in some departments ran somewhat below 1946. In dollars
and in number of pieces,
currency counted
but
there
ran
1946,
was some decline in
the coin division due ahead of
in part at least to extension of arrangements for
banks
with surplus stocks to ship coin directly to those in need.
25
The dollar volume of ordinary checks handled established a new
decline was reported as the
peak, although in physical units some
for
unemployment compensation declined. Declines
volume of checks
drafts,
in
the
collection of non-cash items-notes,
also were shown
facilitate the direct exchange
The
Bank
to
continues
and coupons.
by making settlement on its books
of checks in county and city areas
on mail or wire advices.
Lower Government expenditures and financing operations naturally
departments concerned with the
reduced the volume of work in
handling of Treasury issues and Government checks. Early in the
year the savings division of the Fiscal Agency Department returned to
the Bank from rented quarters that had been occupied during some
years of war-stimulated activity.
Borrowing by member banks, although still small, increased somewhat in 1947. The number of banks accommodated increased from
113 to 153, and some tendency was apparent to borrow for a longer
period than in 1946. Purchases of Treasury bills under the repurchase
option dropped sharply, but this was due to termination of this
arrangement shortly after the middle of the year with respect to all
bills subsequently issued.
s
During these days of huge money supply and inflationary pressures
it is particularly desirable that bankers and the business public comprehend the reasonsfor and the objectives of Federal Reserve policy, to the
end that the gains made by the economy may be preserved through the
wholehearted cooperation of all concerned. To accomplish this and
to obtain on our part a sympathetic understanding of the problems
facing banks and the public, this Bank actively sought opportunities
for the exchange of views. County meetings reaching into
every
corner of the district were held during 1947 in addition to two
conferences of the Federal Reserve Relations Committee, composed
of representatives of bankers' groups and state associations in this
district. Members of the staff also have participated in many
other
meetings, often as speakers, and through the medium of the monthly
Business Review and other publications they have sought to make the
results of our research and statistical activities available to the public.
26
L..
I
i
Directors
Elections in the fall of the year resulted in the selection
and officers of Archie D. Swift, Chairman of the Board of the
Central-Penn National Bank, Philadelphia, as a Class A director by
the banks of Group 1, and of Walter H. Lippincott, President and
Director of the Lobdell Company of Wilmington,
Delaware, as a
Class B director by the banks
Their
Group
terms began
2.
of
January 1,1948. Mr. Swift succeeds Howard A. Loeb, Chairman of
the Tradesmens National Bank and Trust Company, Philadelphia,
who was serving his second term as a director and who for ten years
prior to that was the representative of the district on the Federal
Advisory Council. Mr. Loeb,
a firm believer in the principle of
rotation, asked not to be considered for renomination. Mr. Lippincott
takes the place of Charles A. Higgins, Chairman and President of
the Hercules Powder Company of Wilmington, Delaware, who also
asked that he not be renominated.
By appointment of the Board of Governors of the Federal Reserve
System, Thomas B. McCabe
Board of
continued as Chairman of the
Directors
during
Bank
1947
Federal
Reserve
Agent
and
this
and
at
was reappointed to serve in 1948. C. Canby Balderston was reappointed
a Class C director for a term of three years, beginning January 1,1948.
The district's
Council
representative on the Federal Advisory
during 1947
Exchange
Corn
David
E.
Williams,
President
the
was
of
National Bank
The Board of
and Trust Company of Philadelphia.
Directors designated him
to serve for the year 1948.
Casimir A. Sienkiewicz, Vice President in
charge of research, and
long
associated with the Bank, resigned in the early summer to accept
the presidency
of the Central-Penn National Bank, Philadelphia.
Effective July
1, Karl R. Bopp, Director of Research, was appointed
a Vice President.
27
Directors
as of January 1,1948
Group
Class A:
Archie D. Swift
......................................
Chairman of the Board, Central-Penn National
Philadelphia, Pennsylvania
1
1950
2
1948
Bank,
George W. Reily
.....................................
President, Harrisburg National Bank,
Harrisburg,
Term Expires
December 31
Pennsylvania
John B. Henning
....................................
President, Wyoming National Bank,
Tunkhannock, Pennsylvania
3
1949
William J. Meinet
....................................
President and General Manager, Heintz Manufacturing
Company, Philadelphia, Pennsylvania
1
1949
Walter H. Lippincott
.................................
President and Director, Lobdell Company,
Wilmington, Delaware
2
1950
Albert G. Frost
......................................
President, The Esterbrook Pen Company,
Camden, New Jersey
3
1948
Class B:
Class C:
Thomas B. McCabe, Chairman and Federal Reserve Agent....
President, Scott Paper Company, Chester, Pennsylvania
1948
Deputy
Warren F. Whittier,
Consultant,
Agricultural
1949
Chairman
....................
Chester Springs, Pennsylvania
C. Canby Balderston
...................................
Dean, Wharton
School of Finance and Commerce,
University of Pennsylvania, Philadelphia, Pennsylvania
28
1950
i
Officers
as of January 1,1948
ALFRED
W.
H.
President
WILLIAMS,
J. DAVIS,
L. E. DONALDSON,
First Vice President
Assistant Vice President
C. A. MCILHENNY,
ROBERT
Vice President
R.
WILLIAMS,
Assistant Vice President
ERNEST C. HILL,
and Assistant Secretary
Vice President
WILLIAM
JAMES V. VERGARI,
G. MCCREEDY,
Vice President
and Secretary
Assistant Vice President
and Assistant Secretary
ROBERT N. HILKERT,
Vice President
WALLACE
KARL R. Bopp,
M.
CATANACH,
Assistant Cashier
Vice President
PHILIP M. POORMAN,
RICHARD
Cashier
G. WILGUS,
Assistant Cashier
NORMAN
G. DASH, General
29
Auditor
APPENDIX
Statistical Tables
Page
Statement of condition
.................
Profit and loss account
.................
Volume of operations
..................
Changes in member bank reserves and
related items .......................
Combined statement of member banks....
Applications for industrial loans
.........
32
33
34
35
35
36
Member bank reserves
.................
Employment and earnings
..............
Production, farm income and prices......
36
Department store sales and inventories....
38
31
37
37
Statement of Condition
December 31
Federal Reserve Bank of Philadelphia
(000's omitted in dollar figures)
RESOURCES
Gold certificates .........................
Redemption fund-Fed. Res. notes ...........
Total gold certificate reserves ..........
Other cash
.............................
Discounts and advances ..................
Industrial loans .........................
United States Government securities .........
Total loans and securities .............
Due from foreign banks ..................
Fed. Res. notes of other Fed. Res. Banks.....
Uncollected items .......................
Bank premises
..........................
All other resources ......................
-
Total
liabilities
1
1946
1947
$ 878,051
61,134
$ 858,145
61,009
$1,016,538
60,691
$ 939,185
$ 919,154
$1,077,229
15,576
19,235
14,687
4,386
15,547
523
6,841
1,358
1,763
Total resources
.....................
LIABILITIES
Federal Reserve notes
.....................
Deposits:
Member bank reserve account
............
U. S. Treasurer-general account
........
Foreign
..............................
Other deposits
........................
Total deposits
.......................
Deferred availability items
................
Other liabilities
.........................
1
1945
1,610,468
1,645,130
1,565,522
$1,616,617
$1,661,200
$1,573,721
10
8
7,298
139,850
3,313
4,353
8,181
157,813
3,170
8
10,866
192,379
3,182
2,912
7,455
$2,726,202
$2,771,673
$2,879,527
$1,635,242
$1,699,277
$1,681,880
799,634
59,678
72,195
818,125
34,511
39,555
.
4,308
$
935,815
2,424
$
106,130
CAPITAL ACCOUNTS
Capital paid in
.........................
Surplus-Section 7
.......................
Surplus-Section 13b
....................
Reserves for contingencies
................
Total liabilities and capital accounts....
Ratio of gold certificate reserves to deposit
and Federal Reserve note liabilities combined
................................
Commitments to make industrial advances....
32
894,615
4,708
$
122,081
500
.....................
867,113
77,363
26,649
975,833
164,635
528
898
$2,677,687
$2,716,501
$2,823,246
$
$
$
13,064
28,946
13,926
34,720
4,501
4,489
2,004
2,037
$2,726,202
36.5%
$703
$2,771,673
35.4%
$1,281
14,370
35,350
4,489
2,072
$2,879 527
40.5 %
$490
Profit and loss account
Federal Reserve Bank
of Philadelphia
(000's omitted)
Earnings from:
United States Government
securities......
Other sources
.........................
Total earnings
......................
Expenses:
Operating
expenses*
...................
Cost of Federal Reserve
currency .........
Assessment for
expenses of Board
'uvernors
Total
Current
$9,929
$10,600
134
192
$10,792
$11,413
$ 3,007
$ 3,704
$ 3,887
349
373
316
204
187
214
$ 3,560
$ 4,264
$ 4,417
$ 6,528
$ 6,996
1$6,503
.....................
Additions to
current net earnings:
Profit
on sales of U. S. Government
securities
of
quirements
reserves in
excess of
.........................
Other additions
.......................
on Fed. Res. notes
I
$
Transferred
Transferred
paid
to surplus
(Sec. 13b)
to surplus
(Sec. 7)
150
55
2
52
34
458
$
$
178
453
48
$
$ 6,577
0
0
84
........
.........
3
$
205
38
$
167
$ 7,163
s
5,672
7
814
854
32
llr"
0
6,070
5,774
766
........
227
5
0
............
.....................
to member banks
200
$ 6,956
Sec. 13b
Dividends
$
re-
Deductions from
current net earnings
.......
Net additions
to current earnings
..........
Net
earnings available for distribution.......
Distribution
of net earnings:
Paid to U. S.
TreasuryUnder
138
256
$
Interest
220
of
net expenses
Transfers
$11,193
$10,063
.........................
net earnings
1947
1946
1945
$
630
"After deducting
reimbursements received for certain fiscal agency and other expenses.
°w'Tr;t,
sferred from surplus (Sec. 13b).
1'$3.000,000
also transferred to Surplus from Reserves for Contingencies.
33
-4
Volume of operations
Federal Reserve Bank of Philadelphia
Pieces
1946
1945
1947
handled
or transactions
(000's omitted)
Discounts and advances ..................
Currency counted ........................
Coins counted
...........................
Ordinary checks
in packages by automobile
Checks handled .........................
run service ..........................
U. S. Government checks (including Treasury
card checks) .........................
Ration checks
..........................
Collection items:
Coupons of U. S. Government and agencies.
All other (notes, drafts, and coupons)...
Transfers of funds
Issues, redemptions,......................
and exchanges by
Fiscal Agency Department:
U. S. Government direct obligations......
All other
............................
1
208,611
474,170
115,501
1
243,613
540,658
143,234
17,321
20,820
24,506
70,155
5,041
34,410
832
23,832
327
1,373
180
1,400
193
65
1,378
184
69
68
26,756*
22
17,241
16
12,900*
$ 1,184
1,178
$ 1,065
1,428
48
56,278
$ 1,246
1,547
44
60,726
5,074
3,657
152
257
10,323
142
224
2
253,406
463,374
141,232
1
Dollar
amounts
(000,000's
omitted)
Discounts and advances
...................
Currency counted
........................
Coins counted
..........................
Ordinary checks
U. S. Government ........................
checks (including Treasury
card checks) ..........................
Collection items:
Coupons of U. S. Government and agencies.
All other (notes, drafts, and coupons)
....
Transfers of funds
Issues, redemptions, ......................
by
and exchanges
Fiscal Agency Department:
U. S. Government direct obligations
......
All other
............................
44
47,441
8,40t
131
260
9,032
8,686*
110
Securities held in custody for member banks
at end of year
Savings bonds in ........................
safekeeping at end of year
(number of pieces)
...................
11,745
6,902*
48
$2,207 mil.
$2,485 mil.
303,000
345,000
4,57o*
5
$2,329
*Includes savings bonds sold through other issuing agents, and
redemptions
qualified commercial banks.
34
mil,
354,000
through
Changes in
member bank reserves and related items
Third
1945
1946
1947
+
39
+ 944
-1
74
+ 722
+1
148
+ 751
+1
Federal Reserve District
(Millions
of dollars)
Sources of funds:
Reserve Bank credit
extended in district .........
Interdistrict commercial transfers
Mint gold purchases
..............
, net ..................
Treasury
operations
Total
...
All member banks
Federal Reserve District
(Millions of dollars)
Dec. 31,
1947
-
323
+
62
+
17
+ 233
+
89
-0
+1
+
+
-2
+3
43
18
+
+2
+0
34
49
+
+
62
+
17
+
..................................
Uses of funds:
Currency demand
Member bank
.. . ....
.........
.......
reserve deposits
Other deposits"
.................
at Reserve Bank
Other Federal Reserve
.............
accounts ................
Total
..................................
Third
660
-
..........................
323
587
-
Percent distribution
Change from
Dec. 31,
1946
587
June 30,
1939
Dec. 31, June 30,
1947
1939
Assets
Loans
and discounts
U. S. Government
.............
Other securities securities .......
Cash assets
.................
...............
Fixed assets .....
Other assets ....................
Total
..................
Liabilities
and capital
Deposits:
605
1,613
66
30
+
+
+1
+1
$7,092
ý$
319 +$ 662
309 + 2,447
41
142
195
+
+5
23
613
111
+$3,593
22.3%
45.1
8.5
22.8
.9
.4
100.0%
26.3%
21.4
17.9
28.6
5.1
.7
100.0°/0
accounts
Individuals,
partnerships,
and corporationsDemand
.................
Time
...
U. S. Government
..........
Bank
............
Other
....................
Total deposits
..........
Other liabilities
Capital
................
accounts
.......
Total
+$
$1,582
3,196
..................
...
.
+$2,548
+
754
18
+
28
+
147
$3,802
1,818
68
411
346
+$
+
+
+
$6,445
+$ 178 +
+
-2
ý
+
40
607
$7,092
35
132
78
93
17
45
19
+$
$3,459
19
115
195 +$3,593
53.6%
25.6
.9
5.8
4.9
90.8%
35.8%
30.4
2.5
10.9
5.7
s5.3ý10
8.6
.6
.6
14.1
100.0%
100.0%
June 30, 1934—
December 31, 1947
Applications for industrial loans
Federal Reserve Bank of Philadelphia
Number
Approved .............................................................
Rejected ...............................................................
Withdrawn ...........................................................
Under consideration ...........................................
7
3
0
0
378
460
71
0
Total number...............................................
10
909
Amount
Approved .............................................................
Rejected ...............................................................
Withdrawn ...........................................................
Under consideration.............................................
$2,142,500
907,000
0
0
$66,468,926
18,033,350
4,032,700
0
Total amount ...............................................
$3,049,500
$88,534,976
Member bank reserves
Third Federal Reserve District
(Dollar figures in millions)
Actually
held
Required
Excess
Ratio of
excess to
required
1-15
.......................................
.......................................
.......................................
.......................................
.......................................
$370
388
423
425
451
$357
374
411
415
436
$ 13
15
12
10
15
4%
4
3
3
3
1-15
.......................................
.....................................
.......................................
.......................................
.......................................
272
316
379
388
401
215
247
297
339
350
57
69
82
49
51
26
28
28
15
15
1-15
.......................................
.......................................
.......................................
.......................................
.......................................
642
704
802
814
852
572
621
708
754
786
70
84
94
60
66
12
14
13
8
8
Philadelphia banks:
Average: Jan.
1944
1945
1946
1947
1948
Country banks:
Average: Jan.
1944
1945
1946
1947
1948
All members:
Average: Jan.
1944
1945
1946
1947
1948
36
Employment and Earnings — Pennsylvania Factory Workers
Non-durable Goods
All Manufacturing
Durable Goods
Employ Pay Weekly Employ Pay Weekly Employ Pay Weekly
ment* rolls* earnings ment* rolls* earnings ment* rolls* earnings
Average:
1939 ... .
1940 ....
1941 ... .
1942 ....
1943 . .. .
1944 ....
1945 ....
1946 . .. .
1947 ....
1947:
January . .
February .
March . . .
April . . .
May ........
June . . . .
July ........
August
September
October . .
November
December
*1939=100
100
108
130
140
147
142
127
120
129
100
117
168
219
268
278
240
219
268
$22.42
24.22
29.02
34.95
40.85
43.81
42.26
40.69
46.47
100
118
154
178
195
189
162
141
156
100
129
204
283
356
369
299
241
305
$25.99
28.40
34.33
41.19
47.37
50.63
48.10
44.27
50.85
100
100
108
106
104
101
96
102
105
100
103
124
141
162
169
168
192
222
$19.24
19.82
22.22
25.59
29.91
32.33
33.52
36.25
40.69
130
130
130
129
128
127
126
128
129
130
131
131
254
252
254
256
264
268
262
269
274
284
286
291
43.71
43.50
43-90
44.34
46.14
47.15
46.56
47.13
47.51
48.81
49.15
49.78
158
157
156
157
156
156
153
154
155
156
156
157
287
281
284
291
303
313
303
309
310
323
327
332
47.30
46.63
47.21
48.23
50.48
52.19
51.38
52.04
51.90
53.71
54.39
54.82
106
106
106
105
103
102
102
104
106
107
108
108
214
217
218
213
216
214
213
220
230
236
237
242
38.94
39.37
39.55
39.14
40.27
40.29
40.11
40.63
41.76
42.45
42.36
43.21
Production, Earm Income and Prices
1935-1939 = 100
(Adjusted for seasonal
variation)
Industrial Production
Third Federal Reserve District
Durable Consumer
Total
goods
goods
Income
from farm Consumer
marketings prices in
Phila.2
N. J, Pa.,
and Del.1
Average
1939 ...................................
101.7
103.9
100.3
1940 ...................................
108.7
133.0
95.3
1941 ...................................
199.4
106.0
136.3
1942 ...................................
162.0
289.4
101.3
1943 ................................... 183.3
355.2
103.5
1944 ...................................
178.4
106.2
332.7
1945 ................................... 149.5
251.0
102.3
1946 ................................... 128.1
159.6
113.2
1947 ................................... 134.1
117.2
168.5
1947 January ...............................
175.4
138.7
120.9
February ............................
132.8
117.6
166.3
March ................................
131.8
116.2
164.3
April ...................................
131.2
166.0
116.0
May .....................................
134.1
121.4
163.2
June ....................................
169.2
117.5
134.3
119-0
July .....................................
134.2
168.6
August ............................... 133.1
163.0
116.5
September ..........................
114.2
134.9
169.1
October ..............................
115.2
134.8
170.1
November ..........................
173.4
118.3
136.9
December ..........................
123.6
142.7
184.3
Sources: HJ. S. Department of Agriculture. 2U. S. Bureau of
37
99.4
103.6
122.4
155.0
197.1
199.0
231.0
253.2
291.5
98.6
98.8
103.6
115.3
122.7
124.4
127.4
138.4
158.4
152.3
151.6
156.1
154.9
155.1
157.1
158.3
159.5
163.2
162.2
164.2
166.3
Labor Statistics.
DEPARTMENT
STORES SALES
Third
1935-1939=100
(Adjusted for seasonalvariation) District Phila.
1939
............
1940
............
1941 ............
1942 ............
1943
1944 ............
1945 ............
1946
............
1947 ............
1947 January ..........
February
.........
March
...........
April
............
May
June .............
............
July
August.............
..........
September
........
October
..........
November
........
December
........
caster Reading Trenton
102.6
104.1
101.0
103.7
110.9
111.2
107.5
107.3
132.7
129.2
124.0
129.3
151.5
142.8
139.6
150.6
164.5
151.3
146.8
165.5
176.9
166.5
157.9
178.4
185.3
190.3
183.7
171.5
249.2
247.7
235.4
214.1
275.7
275.7
261.4
238.1
278.1
256.3
247.6
220.8
244.3
257.8
231.0
210.6
241.9
248.8
236.3
219.9
275.0
278.2
258.4
239.8
297.7
287.3
274.7
254.0
269.9
268.4
264.2
245.3
286.8
266.7
257.4
233.2
259.5
266.5
257.7
221.1
277.4
264.9
266.5
241.3
275.6
260.8
252.6
234.5
315.2
293.6
277.9
249.6
287.2
301.1
284.0
260.1
DEPARTMENT
1939
............
1940
1941 ............
............
1942
............
1943
............
1944
............
1945
............
1946
1947 ............
............
1947 January
February ..........
.........
March
...........
April
............
May
.............
June
............
July
August.............
September..........
........
October
..........
November
........
December
........
Lan-
96.2
99.4
119.4
167.0
141.2
147.0
150.1
191.0
220.1
217.5
218.2
223.1
221.0
214.7
211.6
205.1
206.0
210.3
231.0
238.3
244.6
109.8
120.4
139.6
153.5
177.2
192.3
223.0
294.0
320.7
323.4
263.0
277.6
296.8
332.8
281.7
332.5
341.8
309.9
326.9
366.3
362.4
WilkesBarre
101.1
100.7
118.4
129.3
144.6
174.4
205.5
276.9
306.3
271.3
270.0
287.6
317.8
339.8
309.0
298.7
276.6
309.6
293.6
332.0
323.7
York
106.9
113.8
133.3
157.5
176.9
200.0
219.8
276.1
285.1
280.5
237.7
260.9
290.1
303.8
276.4
274.0
282.8
278.1
276.0
298.5
308.4
STORE INVENTORIES
105.7
97.0
95.1
101.2
92.4
112.4
101.5
105.2
110.2
120.3
140.7
141.4
164.9
147.8
189.8
183.8
137.8
126.6
158.3
162.4
143.0
132.0
181.5
165.6
145.6
128.8
190.6
166.5
204.6
184.4
176.8
229.5
207.3
218.4
256.2
244.2
195.6
225.6
296.1
227.7
203.0
223.1
292.7
249.8
206.9
221.0
281.6
229.2
210.7
247.9
234.6
227.5
206.3
223.1
236.6
227.0
202.4
216.1
230.8
223.2
197.3
209.5
218.8
224.5
195.6
197.5
206.9
221.8
197.3
200.5
232.2
216.7
216.2
222.2
272.9
279.7
225.0
224.4
278.2
289.9
230.5
230.8
290.6
301.2
38
92.8
91.4
113.3
142.5
134.5
144.4
154.2
210.0
250.0
253.1
252.0
262.5
244.2
231.7
233.9
222.2
227.1
229.0
258.0
268.2
320.2
108.1
112.6
137.1
176.5
161.2
164.9
158.7
211.6
230.5
243.9
242.0
247.7
251.2
237.8
214.2
201.8
194.5
199.7
234.6
243.6
262.2
@FedFRASER